So we all heard that there was no estate tax in 2010, but did you know that there were no step-up in basis rules? You see, in the years prior to 2010, when someone died and their will gave you their house, you usually got what is often called a step-up in basis. Your basis in the house was the fair market value of the house on their date of death or their basis, whichever was greater. In contrast, if the person made a gift of the house to you while they were alive, you did not get to step-up your basis, instead you got their basis, called the carry-over basis.
Our new tax laws actually are retroactive and say the transfer tax limits for 2010 are $5 million. Of course, it’s not nearly that simple. They let executors and trustees choose whether they want to limit the estate of 2010 to $5 million and get the step-up in basis, or choose no limit to the lifetime exclusion of the decedent but get no step-up in basis. But there’s more. The trustee or executor may apply basis to the assets of the estate for the beneficiaries; up to $1.3 million for non-spouses and $3 million for spouses, limited in both situations to the fair market value. Choices…choices. What’s one to do?
photo credit: Rob the Moment